GDP: Taking Aim at the Stat that Bamboozles

A conservative world leader and two world-famous economists who challenge conservative world leaders have joined up to call for a totally new global economic yardstick. And they want that yardstick to measure inequality.

Sometime early this fall, new statistics are almost certainly going to show “positive” growth in gross domestic product, or GDP, for 2009’s third quarter. Economists, in quick order, will solemnly pronounce that the Great Recession has finally ended. Average working people, just as quickly, will have one more reason to be deeply suspicious about officialdom.

“The world over, citizens think we are lying to them,” a prominent figure in that officialdom, French president Nicolas Sarkozy, noted earlier this month. “And they have reasons to think like that.”

Statistics can lie, and the world’s single most important economic statistic, Sarkozy believes, has become something of a truth-perverting whopper. This all-dominating stat, GDP, essentially measures only what people are making for the market — and ignores every economic reality that impacts how well or poorly real people, in their daily lives, are actually doing.

That’s why GDP can be rising at the same time jobs are disappearing, homes are foreclosing, and paychecks are shrinking.

Last year, in the early stages of the current recession, Sarkozy moved to begin a “statistical revolution” and end GDP’s political dominance. The French president, a right-of-center politico, asked two left-of-center Nobel-laureate economists, Joseph Stiglitz and Amartya Sen, to lead a commission on the “measurement of economic performance and social progress.”

Two weeks ago, just before the meeting of the world’s 20 biggest economies in Pittsburgh, Stiglitz and Sen delivered the product of their commission’s deliberations, a thick report with recommendations for crafting a new yardstick for the world’s economies.

The report’s “unifying theme”: “the time is ripe for our measurement system to shift emphasis from measuring economic production to measuring people’s well-being.”

And that shifting requires, the report goes on to make clear, a serious look at inequality and who has what. The world needs new economic yardsticks that “give more prominence to the distribution of income, consumption, and wealth.”

Current GDP statistics totally disregard questions of distribution. Policy makers addicted to GDP typically divide a nation’s domestic product by population to come up with a “per capita GDP” — and then use this per capita to rate how well off different nations may be.

But this per capita average can be incredibly misleading, as Australian business editor Ross Gittins pointed out last week. If income is rapidly concentrating at the top of a society’s economic ladder, per capita GDP averages can show a “rising” standard of living for that society even if incomes for great numbers of people at the bottom are sinking.

“Per capita GDP,” adds Cohn, “doesn’t take account of the unequal distribution of wealth, but faithfully measures conspicuous consumption as a net gain. GDP ignores environmental degradation, but counts the hospitalization costs of people poisoned by pollution as a positive.”

The Stiglitz-Sen report for French president Sarkozy doesn’t offer a specific statistical alternative to GDP. Sarkozy didn’t ask for one. The report, instead, explores what additional information needs to be collected to better measure real economic well-being — and compares various alternative approaches.

Alternatives already abound. GDP first emerged in the 1930s. The first serious attempt at generating an alternative surfaced in the 1970s. Since then, calculates French economist Christian Chavagneux, the number of “alternative indicators of human and economic well-being” has jumped to about 30.

But these alternatives have all sat at the policy-making margins. Sarkozy’s commission has now placed the challenge to GDP right in the laps of the world’s political leaders. About time, says Neal Lawson, the chair of a top British progressive think tank.

“The irony and frustration is that it takes a right-wing politician to say what left-wing politicians should be saying,” explains Lawson. “Sarkozy has turned the debate on its head. We should start to measure the quality of our lives, not the quantity of the rubbish we consume.”

The G-20 meeting in Pittsburgh, in its final communiqué, didn’t address the Sarkozy Commission’s work. But Stiglitz and Sen see their effort as only a beginning. Their commission, they write, is “opening a discussion rather than closing it.”

The world’s presidents and prime ministers need to join in. With only GDP in their pockets, the commission warns, these world leaders are steering “without a reliable compass.”